11 March 2013

Car Loan Restrictions — Protecting Whom?

Monetary Authority of Singapore recently announced that loans for non-commercial motor vehicles would be restricted.  Loans will be capped at 60 per cent of the open market value (or OMV) of the motor vehicle where the OMV is less than $20,000, and at 50 per cent where the OMV is $20,000 or more.  In addition, the tenure of the loans will be capped at 5 years.[1]

According to media reports, financial institutions that are not regulated by MAS fall outside of the ambit of this ruling and MAS is working with other Government agencies to close the loophole.  These non-regulated financial institutions have to comply with the ruling if they obtain credit facilities from regulated financial institutions.[2]

Protecting the Buyers
MAS says that the financing restrictions are necessary to encourage financial prudence among buyers of motor vehicles.  In the current prolonged environment of very low interest rates, there is greater risk of buyers over-extending themselves on motor vehicles.[1]

MAS is governed by Monetary Authority of Singapore Act.  Its mission is to promote sustained non-inflationary economic growth, and a sound and progressive financial centre.
Irrespective of whether MAS's intention to encourage financial prudence among the population in general or buyers of non-commercial vehicles in particular is good for them, the MAS Act does not seem to empower MAS to regulate the financial prudence among consumers, and MAS may be overstepping its mandate.

It is not for the Government to decide whether its citizens should be financially prudent or how financially prudent they should be.  Otherwise, the Government should not have allowed the casinos to be built and should not have allowed its citizens to gamble at the casinos or anywhere else, including even (some say) the stock market.

It is not for the Government to decide whether permanent residents or foreigners should be financially prudent or how financially prudent they should be (the vehicle loan restrictions apply to all buyers of non-commercial vehicles).

Protecting the Financial Institutions and the Financial System
MAS can say that if the significant numbers of buyers of non-commercial vehicles do not exercise financial prudence, it may affect the financial institutions that make the loans to these buyers, and these financial institutions are supervised by MAS.

MAS can impose whatever restrictions it wishes on the regulated financial institutions in the interest of their financial prudence, but it should not frame the restrictions as being in the interest of the financial prudence of the buyers of non-commercial vehicles.

Even here, MAS's directive fails the reasonableness test.

Car loans of $12.5 billion to professional and private individuals accounted for barely 2.6 per cent of the $491 billion loans and advances by Singapore banks' DBUs (domestic banking units) last December.  Finance companies were relatively more exposed, however: vehicle hire purchase finance of $1.9 billion accounted for 16.6 per cent of their $11.3 billion loans and advances.[3]

In any case, vehicle financing is secured financing and the real exposure of the financial institutions is quite low unless the market value of the financed vehicles shrinks sharply.  However, this will not happen.

Protecting the Government
Irrespective of the state of the secondary market for cars, a large part of the value of a car in Singapore is underwritten by the Government.

The ARF and COE premiums together are almost 80 per cent of the sale price of a new car such as a Mitsubishi Lancer EX 1.6 or a Nissan Almera 1.5 in January 2013 when the average COE premium was $92,100.[4]  When a car is deregistered, Land Transport Authority is obliged to refund the unexpired portion of the ARF and COE.  In the event of a severe economic downturn, COE premiums may fall sharply and it makes sense to deregister cars bought with expensive COEs.  LTA may then face refunding requests from the erstwhile owners of the deregistered cars for hundreds of millions of dollars.

The possibility of a refund of the unexpired ARF and COE also supports the argument that the owners of the cars and the financial institutions providing them with vehicle loans are not significantly exposed, from a financial prudence point of view.

Protecting the General Public
Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam introduced the second reason for the non-commercial vehicle loan restrictions on 7 March.  He said:

"The second risk is that higher COE prices contribute to a higher inflation rate that affects all Singaporeans and the broader economy.  This is because the increase in COE prices does not just jack up price for those who are buying a car, but also shapes inflationary expectations.  It feeds generally into inflation.  Car prices accounted for one-fifth to one-half of CPI [Consumer Price Index] inflation in the past three years.  In 2012, car prices contributed one full percentage point of our CPI inflation.  So by helping to dampen the demand for motor vehicles, the financing restrictions that MAS has introduced aim to cool the COE market and to help alleviate overall inflationary pressures in the economy. This is to the benefit of most Singaporeans."[5]

First, it is surprising that MAS, whose chairman is DPM Tharman himself, did not mention this reason in its press release on 25 February.

Second, the Government can't seem to decide whether or not the impact of car prices on inflation for the general public is important.

Compare DPM Tharman's words above with what he said just two years ago:

"[I]nflation is a key concern for everyone this year [2011], and especially for low-income families...   However, a large part of the CPI inflation increase can be explained by higher COE premiums and the higher imputed values of owner-occupied homes, compared to a year ago.  For the majority of households, these increases do not mean substantially higher cash outlays.  The Monetary Authority of Singapore's core inflation measure, which excludes the effects of these two factors on the CPI, is projected at..."[6]

Perhaps, there has been a change in thinking.  Or, maybe MAS just can't make up its mind?  Whatever the case, MAS should review whether private road transport should continue to be excluded from its core inflation measure.

Finally, is it equitable to impose restrictions on individuals without deep pockets (or whose families do not have deep pockets) so as to restrict demand in order to drive down COE prices?


1. MONETARY AUTHORITY OF SINGAPORE MAS Imposes Financing Restrictions on Motor Vehicle Loans 25 Feb 2013.

2. Authorities Looking to Close Loopholes in MAS Restrictions TODAY 28 Feb 2013.

3. MONETARY AUTHORITY OF SINGAPORE Monthly Statistical Bulletin Jan 2013.

4. LAND TRANSPORT AUTHORITY Cost for Cars Registered in Jan 2013.




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